In 2020, Andra AP-fonden adjusted its internal indices and portfolios for global equities and corporate bonds in order to fulfil the Paris Agreement’s target of 1.5°C. This was a major adjustment task that was performed without compromising return and risk characteristics.
Unique in the world – asset management in line with the EU Paris-Aligned Benchmark
The adjustment adheres to the climate regula-tions adopted by the EU within the framework of the action plan for the financing of sustaina-ble growth. The regulations, which are intended for public index providers that wish their indices to be known as climate indexes, specify two levels of climate adjustment: the EU Climate Transi-tion Benchmark, which is rather less ambitious, and the EU Paris-Aligned Benchmark (PAB). Since AP2 has the ambition of a portfolio in line with the Paris Agreement, it opted for the more demanding regulation: the EU Paris-Aligned Benchmark.
AP2’s indices are solely applied internally by the Fund, and is therefore not actually affected by the regulations. Using external regulations compiled on a scientific basis, according to the conclusions of the UN Climate Panel, by a credible player such as the EU, does present advantages, however.
“These are transparent regulations, so as to reduce the risk of ‘greenwashing’, while stakeholders can also analyse and influence this going forward. For us who would like to have a portfolio in line with the Paris Agreement, these regulations have come at the right time,” says Tomas Morsing, head of R&D at AP2.
The criteria are based on the conclusions of the UN Climate Panel and are intended to support the broad social change required to achieve the climate goals under the Paris Agreement. This entails the divestment of certain companies, primarily with activities within fossil fuels, while also requiring continued exposure to sectors that are important to achieving the climate transition.
“It would have been easy to reduce a carbon footprint index by solely investing in sectors with small emissions, such as IT. But in such case, there is no financing contribution to sectors and companies that are important for the transition, such as producers of wind farms or renewable materials,” says Tomas Morsing.
A PAB index must have a 50-per cent lower carbon footprint than a market-weighted index, and thereafter annual reductions of 7 per cent, to achieve net zero emissions by 2050. This presents an incentive for companies to continuously reduce their emissions, in order to stay in the index.
“There is also a stick. If you leave an index, this usually means a lower share price and more expensive financing in the credit markets,” says Tomas Morsing.
The PAB indexes are an extension and ampli-fication of the Fund’s previous sustainability- adjusted multi-factor index and has the same good return and risk profile. The task of creating them was mainly a challenge on the credit side, since liquidity restricts the practical usefulness of an index.
“The team has done an excellent job and created one of the first indexes of this type in the world. This required a lot of work, with a very fine result,” says Tomas Morsing.